The Financial Institutions Development Fund (FIDF) is to be reinstated to its former role as a backstop for the country’s financial sector in a move that commentators consider a step backwards, driven by the sovereign’s growing fiscal burden.
The government is reverting to its old system of using the FIDF, overseen by the central bank, as a lender of last resort, to supply funds if any of the country’s lenders get into difficulties.
The move is a reversal in policy after the implementation of the deposit insurance act in August 2008, which was intended to remove the need for the FIDF by collecting fees from the country’s banks to fund the insurance of financial institutions.
However, last year the central bank realised it needed to use these fees to finance the interest payments from FIDF loans extended during the Asian financial crisis, as the sovereign’s fiscal headroom narrowed.
As such the Ministry of Finance (MoF) hiked the cost of insurance for banks and at the same time lowered the amount guaranteed for every amount, siphoning off the excess fees to finance the repayments.
Amid all of this however, there was much discussion about trying to reduce the number of outstanding FIDF loans. As such, commentators were surprised that the government is looking to reopen the lending facility.
“It’s a bit of a surprise move in that there’s been a fair amount of focus on trying to cut down the loans that were given out through the FIDF during the Asian crisis. The rationale for doing that was trying to free up the balance sheets of the government for other measures,” said Barclays economist Rahul Bajoria.
“This reversal of the FIDF as the lender of the last resort comes at a time when the public debt in Thailand has been edging higher. If you look at where that additional public burden comes from, it’s from government guaranteed loans to its own special financial institutions.”
These include the Bank of Agriculture as well as the savings banks which to a certain extent are outside the purview of the BoT, according to Bajoria.
Increased risks
The primary concern about this shift in responsibility is that it has come about as a matter of necessity rather than choice, due to an increase in the sovereign debt.
“The ideal scenario would be for the government to prioritise its fiscal spending so it doesn’t have too much on its plate and then try as soon as possible to go back to the path it was on earlier, which was to collect fees from the banks to establish a deposit insurance scheme with new laws governing it,” said Santitarn Sathirathai, economist at Credit Suisse.
Another issue is that if the liability lies with the FIDF and the central bank, there is a certain element of moral hazard which would have been eliminated if the deposit insurance scheme had been successful.
“If the government chooses to go back to the old system, it is important to ensure that the system is properly designed to minimise risks of moral hazard – one of the key issues that was supposed to be addressed by the new deposit insurance scheme,” said Sathirathai.
The FIDF played a major role in sullying the image of Thailand’s central bank during the Asian financial crisis, when it lost around THB1.4 trillion (US$45.48 billion), by injecting money into several struggling financial institutions including the Bangkok Bank of Commerce, which was subsequently shut down.
However, the new rules state that the FIDF must consult the government before helping out any financial institutions under duress, a safeguard which should prevent any losses on a similar scale. According to local press, the fund will be allowed to extend loans to financial institutions (FIs) only once the FI has drawn up a plan that has been approved by the ministry of finance.
“In some sense initial indications suggest that this legislation can be used to bypass the BoT, if there is a need to recapitalise the state financial banks then this legislation will help them fastrack the process. I wouldn’t like to read too much into this step but I think it empowers the government and gives it more flexibility to support these banks,” said Bajoria.
“There was a very public battle between the central bank and the MoF about who should be responsible in the first place, so this actually opens up more questions in some ways such as why are they doing this right now,” he added.
However, he pointed out that from a broad perspective it doesn’t really matter which agency has to step in, as long as there is some form of backstop for the country’s financial sector in place. Others agreed, saying that Thailand’s banking sector is looking stronger than ever, and that as such, the change in responsibility is likely to have little immediate impact.